Taken at face value, the energy retail sector would appear to be ripe for outsourcing — after all, the basics of the sector are the same the world over: Metering, billing, payments and debt collection. Many business processes in the sector entail minimal customer contact, so concerns over the direct impact on customers can be addressed, and at the retail end of the market, the services offered to customers are relatively simple. So, when looking at the future, we need to ask why more energy retail work isn’t outsourced already? The answers, I believe, lie in the industry and cost structure.
Across most of the world, energy retailing at a local level is a monopoly activity and in many cases is tied to the infrastructure provider. Pricing is often regulated on a cost-plus model. So, the competitive pressures that would normally lead to outsourcing are simply absent. Allied to this competitive impediment is the cost structure of energy retailers, the lion’s share of which is taken up by energy, transportation and distribution costs. For most of the time the costs of outsourcable processes are just not the hot topic.
Is there a market for outsourcing in energy retail in 2010? It depends. First, on whether retail markets truly open up, pressurizing firms to seek low-cost providers, but more fundamentally on whether wholesale commodity markets are open, and transportation and distribution access are made transparent. Without the further opening of such markets, outsourcing is likely to be ad hoc at most, but without well-functioning upstream markets, the cost opportunities from outsourcing will probably not be worth the bother.
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Global Services
PREDICTIONS
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Driven by climate change, as utilities companies come under pressure to tighten control over production, they will resort to outsourcing
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Yet, the monopolistic nature of the sector will keep the pace of outsourcing slow.
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If this argument is true, and the development of a large market for outsourcing in the energy retail sector is tied to the development of competition in the industry, then the size of the opportunity is anyone’s guess. Taking the EU as an example, the answer requires a crystal ball to figure out which pressure will come to dominate: Central EU demands for de-regulation and transparency in transportation, incumbent resistance to separation of infrastructure and retail, fear of upstream domination of the wholesale gas market .…
There are enough open, functioning energy retail markets across North America, the EU and Australia to present a significant opportunity for business-process and IT offshoring, and that whatever the confusion of competing market forces, the trend will be toward more rather than less competition. Moreover, the opportunities are for outsourcing not just offshoring, as most energy retailers lack the competencies required to compete with business-process and IT outsourcing companies.
Addressing the Market
A hard reality. Recent Business Process Outsourcing (BPO) conferences have been full of talk about moving toward higher-end offerings for customer companies. This is good and as it should be in a young competitive market, but like any retail business, energy retail is all about detail, and most BPO participants haven’t yet gained the capability to move beyond the basics, EXL and WNS being notable exceptions.
A market within a market. The BPO industry needs to get more deals closed in the sector to create a labor pool prepared to invest their time in understanding how the energy sector works. Right now BPO workers can see many opportunities in travel, finance and insurance; they don’t see this in energy.
European-language capability. Despite the difficulty in predicting the speed with which the EU’s energy retail sector will open, it remains a good bet. Without European-language capabilities, a BPO will go nowhere in this market.
The attrition madness. Going upmarket to more knowledge-based work in energy retailing will mean developing domain expertise. In part, this can be developed by closing more deals and creating a larger talent pool. What this won’t do is create a deeper talent pool. Few energy retailers are going to take the risk of placing the detailed knowledge of how their industry works in the hands of people that will switch jobs for short-term advantage. This isn’t a problem that energy retailers face in their first wave of outsourcing, but is an absolute impediment to releasing the full value of their BPO partnerships.
From cost to value. The euphoria of cost reduction is soon forgotten or at least banked. BPOs then face a new and harder challenge. BPO in energy retail cannot expect significant new business on the back of the growth of their clients. Faced with a static revenue stream, BPOs can either choose to accept this, and hope that someone else can’t do it cheaper, or shift to a value-based approach to their relationship.
Value-based Approach
A value-based approach is not the same as value-added! Although the provision of top-end analytical capabilities is clearly a value-added proposition, in many cases it is discretionary spend. An enduring value-based approach means committing resources to understanding core business processes in depth over time, not solely at a transactional level, and reflecting a value-based approach in commercial relationships; the reverse of transaction or manpower-based pricing. Further, this approach will require an understanding of the energy retail business outside of the confines of the processes performed by the BPO. This will require an investment by the BPO, but also the willingness by the energy retailer to provide knowledge sharing far outside the confines of the original relationship.
[The author’s views do not represent the views of Centrica and British Gas.]
Having worked in the energy and utilities industries for 19 years, Stuart is currently British Gas’ Head of Processing Operations, managing their back-office activities at six sites in India and the U.K. During 2006 he managed the migration of 2,400 roles from British Gas to two BPO partners (EXL Service and WNS) in India.
